What I’m buying next… and why.

I was writing the other day about some of the challenges facing Aussie property. Just to be clear, I’m not worried about a ‘crash’ or the ‘bubble bursting’, or any of that rubbish. I just think there are a few factors that could put a cap on the current cycle.

And that’s the thing to be mindful of. Markets move in cycles. And after several years of strong price growth, the chances of slower growth outcomes increases with every passing year.

It’s just a reality.

And as the cycle gets long in the tooth, the opportunities to benefit from immediate market growth get harder to come by. That’s why right now I’m working my existing properties harder, and looking further afield for my next buying opportunities.

And when you think about it in this light, the US market starts to look pretty interesting.

Because the cycle is still young in America. The economy has taken its sweet time to gain traction, and the housing market has dawdled along with it.

But now, that seems to be turning.

And the clearest read on that is in the rental market. Rents are rising quickly (much more quickly than incomes) and now people are worried about an affordability crisis.

The Wall St Journal was running the story:

“Much of the problem is attributable to simple supply and demand. The job market has improved and millennials are entering the labor pool in force, boosting household formation. But in a structural shift for the real-estate market, new households are much more likely to be renters than buyers.

In the first quarter of 2015, the number of U.S. households was up by almost 1.5 million from a year earlier… but the net increase was entirely due to renters, while the number of owner-occupied households fell slightly. That’s broadly been the case since the housing bust, with new household formation consistently coming from renters rather than buyers. The homeownership rate hit a 48-year low, according to estimates published Tuesday by the Commerce Department…”

So there’s a few things I take from this.

The first is that this seems to be what you would expect. At this early stage of the cycle, you’d expect household formation to come from renters.

So when the GFC hit a lot of people moved back in with their parents, or back into share-houses. And young kids who were thinking about moving out decided they’d be much better off staying put.

So for a few years there, household formation went into reverse. The number of US households actually shrunk.

But now that the economy is gaining traction, the younglings finally have the courage to go it alone.

(Or their parents finally have the courage to turf them out of the nest.)

And so the number of households is growing again. Starting with renters. After the renting pool grows, people will get back into buying and the owner-occupier class will rise.

But in the meantime, as all these new people compete for rentals, the rental market gets tighter and tighter. And vacancy rates have fallen to a 30-year low.

And as the rental market tightens, rents start to rise.

And across the country, rents are now 3.5% higher than a year ago. That might not sound like much, but it’s decent in a country where inflation is minimal. And it’s accelerating.

And in some states, it’s much higher. Like in the booming tech states and cities, like San Francisco, San Jose and Denver. Rents in those cities are growing between 5 and 8%.

This is classic cycle stuff.

Because as rents start to rise, two things happen. First, the cost of renting vs the cost of buying starts to even out. And so the people with a deposit do the sums and decide they’re better off buying.

Housing demand grows.

And the increase in rents means that rental yields start to rise.

At the margin, properties become more attractive to investors. They’re willing to pay a little more.
And so housing demand gets a lift from two sources.

And that, of course, translates into higher prices.

And so we’re looking at a resurgence in American house prices in some areas. It will be patchy at first, but as the economy strengthens, and the rest of the country comes online, we should see broad-based increases in house prices.

And so there’s an ‘early-buyer’ opportunity here.

House prices are lifting in some areas. Make no mistake about that. But there’s still plenty of bargains to be found.

And that’s the amazing thing about the US right now. In America you can pick properties up for $50K.

I’m not talking deposit. I’m talking in total. $50K!

And with a tighter rental market you’re looking at cashflow of $10K a year.

Do the maths. That’s a 20% yield.

I love Australia, but show me anywhere in the country where you can get those numbers.

So with the Aussie market facing some headwinds, I’m taking the time to do a bit more gold digging in the US.

Comments

I have been watching and liking the US market for 5 years now. But I did not make the further effort to learn more and buy when USD prices were even lower than now. But with the exchange rate having raised prices by 50% in AUD terms, how can i do it now? A big psychological hurdle to overcome….. too late for me.

Good question. It’s pretty easy. All you need to do is set up a LLC
company over there to purchase… that’s it. But there are much much more
important issues than that (and some serious traps!) …we’re running a 3
day event that you can get all the education on the ins and outs… If
you’re keen and serious, attend that one.

Hi Jon,
l went over to texas with $220,000 Cash to set up my Quad last June, when the Aus $ was still around 90c as l was told the houses were $50,000. There was not one around that price from around 60 that we could choose from. Was unlucky and ended up with 2 after 6 months when l got back that were over $60,000 each . Now most are around $65,000 US which is around $95,000 Aus. Show me the $50,000 houses. Its easy to say and criminal as well, as l would not have gone over if l had of known that l could not buy 4 at $50,000 to set up a Quad. l was told that it is just easier to do the numbers on 50,000 in the examples shown in the seminar. Nice excuse, but hey say it like it is. l am still waiting one year later for a house to come up at $50,000. Its not happening and stop fooling people saying that there are.

Hi Helena,
What did the projected numbers on the investment profile (which gets emailed to all persons on the ATW investor database) say? What is the projected cashflow, which, if you went in 2014 to purchase properties then they should be a positive cashflow position by now (not to mention that the USD/AUD now = each payment is effectively 20% higher).

In the bigger scheme of things, I’m finding it difficult to sympathise with your situation, given that were able to purchase 2x US properties. If you’re complaining about *only* being able to purchase 2x 3br/1br houses when in Aust you would barely be able to find a flat at that price in any capital city, then it probably says a lot about your negative mindset rather than any fault of ATW or Jon Giann.

So it may take a bit longer than you expected, aka 2-3years rather than having a complete Quad in 12mths. Deal with it – not everyone is in nearly the same financial position as you.

Hi Mark,
l am not setting up a quad as l do not trust this company after they lied about the prices of the houses that you could buy. A lie is just that, A LIE.
There are a lot of Property strategies that you can do and all l am saying is that if l had not been lied to l would have picked plan 2 which is what l ended up going with when l got back. l was not interested in setting up a quad over 3 or 4 years because if that was what was said to me right up front l would not have put my money into ATW ‘s property strategy to start with as it wasn’t that good a strategy compared to other investment strategies l was also looking at.
l chose ATW because l was told that l could buy 4 properties for $50,000 each, and set up my Quad if l went over to Texas. This did not happen as there were no houses at that price, yet alone 4.

Its got nothing to do with sympathy its about being up front and telling the truth. l do not like it when people are talking bullshit and lying, and l am not going to sit back and say nothing when l know that what is being said is a load of rubbish which is why l wrote my post. l do not like being lied to and getting stuffed about, and l do not like seeing other people being taken for a ride either, it just destroys trust and is very unprofessional.

l do not do business with people l do not trust. Once trust is broken projected numbers, return on investment and amount of time it takes is all irrelevant.

Byron, its a fair question but I’ve seen it stop people from doing
anything. Yes, recent currency moves mean it will cost you more in an
Aussie dollar sense to get into the USA market… but your yield or
cashflow doesn’t change because your getting paid in American dollars
not Aussie… 15-20 % is still 15%-20% despite the currency… for me the
USA is a cashflow play…currency movements don’t bother me too much once
I’ve bought. But yes if you bought when the AUD was dollar for dollar
with the US, the capital value in Aussie dollars would have gone up even
if the property values stayed the same in the USA. As far as if it is
too late… That depends on if your a looking for capital growth or
cashflow…and where you’re looking. Personally I will buying in the
states for the next 12-24months…

John makes mention of rents rising in San Francisco – it’s on a par, if not more expensive, than Sydney. We’ve got a couple of properties in Atlanta but be aware that property managers in the US charge more and do less than those here. Supposedly stable job-holding tenants can (and do) just bail at the drop of a hat. Sure, you could sue them – if you can find them, and pay a fortune to do it, so they know no one will bother. US tax returns are a nightmare too. But at $50K for a house (although bear in mind that’s USD – was about par when we bought ours – that would be about $70K) still worth the risk.

I bought a duplex in Kansas through an agency specialising in USA Property just over 2 years ago. Yes, they knew their way around the legal system and produced all the correct documents but the issue is ‘control’. In the last 2 years the tenancy has been around 60%, frequent tenants and the usual one or two ‘disappearing’ leaving a few weeks of unpaid rent. There’s been a bit of damage done and dealing with property agents from a distance is not always easy. Add to that, I had my Wells Fargo bank account closed in the USA by a government directive for all overseas onwed accounts (unless you turn up in the bank in person to verify you’re a real person). It’s a rocky ride, don’t be fooled by all the gloss and huge numbers being thrown around by the spruikers !!
On the plus side I purchased the property when the Aussie dollor was 1:1 with the Greenback, so at least there’s a 30% buffer in the current value.

It’s called Billionaires sinking and floating countries with there investments. What happened to Greece when they pulled their money out of the bank? Banks don’t loan money to Aussies so it requires cold hard cash..I have a local stadedgy,you have thought this through well and no doubt it will work..Just not for me..Cycles?? Not anymore!!

Newsletter

Join over 217,477 Wealth Seekers and Get No B.S. Timely and Valuable Education On The Latest Trends An Opportunities To Make Money Today.